Brexit will hurt Latin America

Outside the building of the European Commission in Brussels, Belgium , following the UK decision to secede from the European Union.
Jasper Juinen
Bloomberg

Britain's June 23 vote to leave the European Union (EU) will have economic ripple effects that will hurt Latin America, but its potential political impact could be much more dangerous.

Let's start with the economic consequences of the Brexit, as Britain's decision to leave the EU is now universally known.

First, most economists agree that it will cause a further decline of Latin American commodity prices, which have already fallen substantially over the past four years.

The Brexit is expected to bring about a sharp slowdown in European trade, which would slow down world economic growth. That would bring down Latin American commodity prices, because slower world economic growth means that rich countries will buy less oil, minerals, grains and other raw materials that Latin America sells.

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According to a recent Inter-American Development Bank study, Bolivia depends on commodities for 97 percent of its export income, Venezuela for 96 percent, Ecuador for 94 percent, Peru for 87 percent, Chile for 88 percent, Colombia for 83 percent, Argentina for 69 percent and Brazil for 67 percent. Mexico and Central America are less dependent on raw materials than South America.

Second, Brexit will hurt investments in Latin America. Britain's vote to leave the EU has brought about anxiety among investors, dragging down stock markets worldwide. And in times of uncertainty, investors flock to places they consider safe, such as the United States, and tend to avoid putting their money in emerging markets.

In addition, the flight to U.S. assets is strengthening the U.S. dollar, which makes it more expensive for Latin American countries to pay their dollar-denominated debts, and for Latin Americans to pay for imported goods, or to vacation in Miami.

Many economists fear that the current nervousness in financial markets will drag out for months, if not years. According to EU rules, Britain and EU members will have two years to negotiate the terms of Britain's exit.

During that period, other EU members such as the Netherlands may seek to follow Britain's example and leave the EU. Much like in Britain, populist politicians in the Netherlands blame the EU's admission of Middle Eastern refugees for the country's economic problems.

Most analysts agree that Europe can expect several years of political turmoil. "This won't be a temporary storm," says Alberto Bernal, chief global strategist with XP Securities.

Fears of a EU breakup are not entirely irrational. There have been many chain reactions in recent world history.

After the 1989 fall of the Berlin Wall, many Eastern European countries declared their independence from the former Soviet Union. In the 2000s, Venezuela's oil-fueled radical populism spread to several other Latin American countries, and the so-called Arab Spring swept across a large chunk of North Africa.

Third, Brexit will hurt Latin America's free trade negotiations with Europe. Following the recent changes of governments in Brazil and Argentina, South America's Mercosur trade bloc was trying to revive 16-year-old talks for a bilateral free trade deal with the EU. That will be hard to do now, when the EU will be busy trying to fight for its own survival.

My opinion: Brexit will have a serious impact on Latin America, but it won't be catastrophic. On the plus side for Latin America, it will help keep U.S. interests low, which may drive international investors to return to the region seeking higher returns for their money once the current nervousness subsides.

But Brexit's biggest long-term risk is political. It may embolden anti-globalization, protectionist demagogues everywhere, including Donald Trump in the United States. After the Brexit vote, Trump has already stepped up his promises to re-negotiate the NAFTA and Trans-Pacific Partnership trade deals.

With all of its faults and pending assignments, globalization has brought worldwide growth and an unprecedented reduction of poverty in China, India, the rest of Asia and — at a slower pace — in Latin America. And the EU has been a symbol of the benefits of common markets and free trade.

A return to protectionism could lead to the trade wars that triggered the Great Depression in the 1930s, and both Asia and Latin America — which depend on trade much more than the United States — would be among the biggest losers of a new world depression. We should all be cheering for the EU's survival.